A Disequilibrium Rational Expectations Model with Walrasian Prices and Involuntary Unemployment

Paul Madden

Review of Economic Studies, 1992, vol. 59, issue 4, pages 831-44

Abstract: A fixprice, non-Walrasian temporary equilibrium that coexists with the Walrasian equilibrium at Walrasian temporary equilibrium prices has been called "unsatisfactory" by F. Hahn (1977). If consumers live and work for two periods, expectations of future unemployment easily (in particular with normal goods) generate unsatisfactory Keynesian unemployment equilibria if these expectations reflect serial correlation in unemployment. Assuming that the choice of temporary equilibrium (Walrasian or Keynesian) is governed by an extraneous, "serially correlated" random variable (sunspots), a long-run equilibrium of an overlapping generations model is presented that has persistent Walrasian prices, rational expectations, and intermittent phases of Keynesian unemployment and Walrasian full employment. Copyright 1992 by The Review of Economic Studies Limited.

Date: 1992
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